Editor’s Note: This article was updated on Dec. 14, 2020, to correct the spelling of Taleeb Noormohamed’s name.
In a world where the most successful retailers, like Costco Wholesale (NASDAQ:COST) and Target (NYSE:TGT), have valuations close to their annual sales, one name stands alone. Lululemon (NASDAQ:LULU). On Dec. 8, LULU stock was trading at $371 each.
That’s a market cap of $48.4 billion on sales that should approach $4 billion this year. Its third quarter earnings are due out December 10. Analysts expect revenue of $1.01 billion, and are hoping for net income of 95 cents per share.
As retailers go, however, Lululemon is ridiculously overpriced. It’s priced where it is because it’s more than a retailer. Lululemon designs its own products, handles its own manufacturing and tries to sell only at retail. It was Nike (NYSE:NKE) years before Nike. It has put every other clothing line in its shadow.
Why They Buy
I know why women, and even men, buy from Lululemon. It has a reputation for quality and it’s selling a lifestyle. But 10 times revenue? You’ll have to ask the analysts.
JPMorgan Chase (NYSE:JPM) analyst Mathew Boss sees a market filled with opportunity. Menswear, personal care and international have barely been tapped, he writes. Of 22 analysts following the stock 16 say “buy” it, none say “sell,” and their average price target remains above the current price.
Lululemon is beating earnings estimates, even during the pandemic, and keeps expanding its reach. The purchase of Mirror, which lets people watch both themselves and a trainer in their homes, has Lululemon talking of an expansion into footwear.
Taleeb Noormohamed, CEO of online retailer Jane, told me Lululemon “benefited from everyone being home, with the idea that getting dressed up is putting on darker yoga pants.” What matters is the brand. Lululemon’s message is “bringing balance and zen to a crazy world,” perfect positioning for 2020. Mirror alone could rival Peleton (NASDAQ:PTON), which is worth $34 billion.
But 10 Times Revenue?
But 10 times revenue? When August quarter earnings sent the stock down, our Luke Lango pounded the table for LULU stock. Those who followed his advice were rewarded. The advance was helped by a share buyback plan, very rare in the 2020 market, that limits any weakness in the shares.
Still, yoga and athleisure aren’t the cloud. Copying the clothes, or something like them, isn’t that hard. Kohl’s (NYSE:KSS) is just one of its new competitors. The Gap’s (NYSE:GPS) fastest-growing store is Athleta, a direct competitor. Nike is also selling yoga outfits and will become fiercer if Lululemon goes into shoes.
The idea of creating top-quality store brands and controlling them, from design and manufacture to retail sale, isn’t that unique, either. That’s what Target and Costco do. They’re worth about as much as their retail volumes, not twice, not 10 times.
The Bottom Line on LULU Stock
Lululemon is a bubble stock.
I don’t think I’m insulting management by writing that. The company is very well-run, and each drop has been followed by a steep rise. LULU stock makes money for investors.
The stock is beyond expensive because investors buy the future, not the present. Just as with a cloud application like Zoom Video (NASDAQ:ZM), speculation is built on tomorrow’s results. With Mirror, with the idea of footwear, and with personal care products, Lululemon can spin a truly glorious future.
But its valuation must come down to Earth. I don’t know when that will be, or where it will land. But no retailer can be worth 10 times revenue forever. None.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn.